BILL ANALYSIS �
SB 1069
Page 1
Date of Hearing: June 19, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1069 (Corbett) - As Amended: March 15, 2012
PROPOSED CONSENT
SENATE VOTE : 39-0
SUBJECT : DEFICIENCY JUDGMENTS
KEY ISSUE : SHOULD HOMEOWNERS CONTINUE TO ENJOY LONGSTANDING
DEFICIENCY JUDGMENT PROTECTIONS WHEN A HOUSE LOST TO FORECLOSURE
WAS REFINANCED DURING THE BORROWER'S OWNERSHIP OF THE PROPERTY?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This non-controversial bill would extend a borrower's protection
against a deficiency judgment to include refinance loans, but
only to the extent that the refinance loan is used to pay off
the unpaid principal amount of the original purchase money
mortgage loan (which itself already enjoys such protection.)
According to proponents, unbeknownst to most borrowers,
refinance loans lack an important protection under California
law enacted in the 1930s, during the last major economic
calamity. For the original loan, the homeowner could not be
personally liable for a deficiency judgment if the amount the
borrower owed the lender exceeded the value of the property as
determined by a judicial foreclosure. Refinancing causes
borrowers to lose that protection against deficiency judgments,
which supporters contend is unfair to borrowers and inconsistent
with recent changes in California law that strengthen
anti-deficiency protections, for example, when there is an
approved short sale of the property. This bill applies only
prospectively to refinance loans entered into on or after
January 1, 2013, so does not affect previously negotiated
existing contracts. The bill is supported by realtors and
bankers, as well as the Center for Responsible Lending, and has
no known opposition. It previously was passed by the Senate
without receiving a single "No" vote.
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SUMMARY : Extends existing borrower protection from deficiency
judgments for purchase money loans to also include refinanced
mortgages. Specifically, this bill :
1)Provides that no deficiency judgment shall lie in any event on
any loan, refinance, or other credit transaction
(collectively, a "credit transaction") which is used to
refinance a purchase money loan, or subsequent refinances of a
purchase money loan, except to the extent that in a credit
transaction, the lender or creditor advances new principal
which is not applied to any obligation owed or to be owed
under the purchase money loan, or to fees, costs, or related
expenses of the credit transaction.
2)Provides that any new credit transaction shall be deemed to be
a purchase money loan except as to the principal amount of any
new advance, and that payment of principal shall be deemed to
be applied first to the principal balance of the purchase
money loan and then to the principal balance of any new
advance, with interest payments to be applied to any interest
due and owing.
3)Limits the above protection from deficiency judgments only to
credit transactions occurring on or after January 1, 2013.
EXISTING LAW :
1)Establishes procedures by which a deficiency judgment can be
sought for the balance due on an obligation for the payment
for which a deed of trust or mortgage was given as security.
Allows the court to render judgment for not more than the
amount by which the entire amount of indebtedness due at the
time of sale exceeded the fair market value of the real
property or interest therein sold at the time of sale, with
interest from the date of sale, as specified. (Code of Civil
Proc. Sec. 580a.)
2)Prohibits a secured lender under a deed of trust or mortgage,
following a judicial foreclosure, from obtaining a deficiency
judgment against the borrower, but only to the extent that the
loan is a "purchase-money loan" used to pay all or a part of
the initial purchase price of the dwelling that was occupied
by the purchaser. (Code of Civil Procedure Section 580b.)
COMMENTS : This non-controversial bill seeks to extend purchase
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money anti-deficiency protection to homeowners who under current
law lose such protection if they have refinanced their
mortgages. According to the author, this bill is needed
because, unbeknownst to many homeowners, refinancing one's
mortgage causes them to lose their existing anti-deficiency
protection in the event of foreclosure. This bill would restore
that protection, but only to the extent that the subsequent loan
was used to pay debt incurred to purchase the property.
The author states:
Under current state law, lenders may seek a deficiency
judgment in a judicial foreclosure for a non-purchase
money loan. Refinanced loans are considered non-purchase.
It is unfair to subject homeowners to new personal
liability merely because they refinanced the original
mortgage. The unfairness is particularly acute in that
almost no borrowers understood the new liability that was
being acquired along with the refinance. This
consistency and uniformity is in the best interests of
borrowers and lenders. The anti-deficiency rules
encourage a lender to underwrite a refinanced loan at
least as carefully as a purchase money mortgage. This
bill protects borrowers . . . and restores fairness to
the process.
Recent data on refinanced mortgages supports the need for the
bill. According to the author, this bill is timely needed to
protect unknowing homeowners from deficiency judgments because
refinanced loans make up a significant proportion of mortgage
originations nationwide. According to data from the Mortgage
Bankers Association, over two-thirds of mortgage originations
derived from refinances, accounting for about $1.7 trillion of
total mortgages since 2010, reflecting a steady increase of
applications for refinanced loans as homeowners understandably
attempt to take advance of lower interest rates.
In addition, recent Freddie Mac data on refinanced mortgages in
the West Region (including California) shows that in both 2010
and 2011, only 18% of refinances had at least a five-percent
larger loan amount than the loan paid off, while 82% of
refinances resulted in no change in the loan amount or a lower
loan amount. (Source: http://www.freddiemac.com/news/finance/
refi_archives.htm ). These figures suggest that this bill will
still benefit the large majority of persons refinancing their
homes, even though its protections only apply to the extent that
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the refinance is used to pay debt incurred to purchase the real
property, and not where the lender or creditor advances new
principal creating a larger loan amount.
Current anti-deficiency law protects only the original
purchase-money loan, but not refinance loans. California has
several anti-deficiency statutes to protect borrowers in real
estate transactions. These statutes protect borrowers when
their home is sold in foreclosure for an amount that is less
than what they owe on their loan. A deficiency is the liability
of a borrower to the lender for the amount of the loan in excess
of the value of the real property, as determined by a judicial
foreclosure.
According to the author, Code of Civil Procedure Section 580b
was originally enacted in the 1930s, during the Great
Depression, as part of a package of bills intended to protect
borrowers in financial transactions secured by real property.
The original bill provided that vendors holding purchase money
trust deeds were barred from obtaining deficiency judgments. In
1963, the statute was amended to provide that lenders holding
purchase money trust deeds on owner-occupied residential
property were also barred from obtaining deficiency judgments.
As noted above, "purchase money" is generally understood in the
real estate market to mean any of the financing used to acquire
residential property.
In other words, existing law protects residential borrowers
against deficiency liability on their original loan for the
purchase of a home, regardless of the method of foreclosure the
lender uses. However, under current case law, this
anti-deficiency protection is lost if the original loan is
refinanced. Refinancing causes a loan to change from
"non-recourse" - meaning the borrower is not liable for any
deficiency - to a "recourse" loan - meaning the borrower may be
liable for a deficiency. Supporters of this bill contend that
extension of these protections is appropriate because many
borrowers may have been unaware that refinancing eliminated
their anti-deficiency protection.
Anti-deficiency protection extended by this bill is
appropriately limited. According to the Insolvency Committee of
the Business Law Section of the State Bar, the sponsor of this
legislation, the bill is intended to prevent a refinancing
lender from pursuing the homeowner, after a judicial
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foreclosure, for payment of the balance of the original purchase
loan that would not have been recoverable absent a refinance.
However, the anti-deficiency protection offered by the bill to
the purchase money obligor is strictly limited to the unpaid,
original principal balance of the purchase money obligation.
Consequently, if the purchase money obligation is refinanced and
additional principal is advanced by the refinancing lender
(commonly called a "cash out" refinancing), the borrower's
protection does not extend to the additional sums advanced. A
completely new home loan, taken out at some time after the
original home mortgage loan has been fully paid off, would not
qualify as purchase money and hence would not qualify for the
proposed extension of anti-deficiency protection.
This bill applies only on a prospective basis, addressing the
main concern that previously led to its veto. This bill is
substantially similar to SB 1178 (Corbett) of 2010, a bill that
was vetoed by Governor Schwarzenegger in part because of
concerns about its effect on existing contracts. In his 2010
veto message, the Governor stated: "This bill fundamentally
alters the nature and impairs the value of previously negotiated
contracts, leading to negative consequences for the value of
those loans held in a lender's portfolio and a deleterious
impact on the secondary market. Fundamentally altering the
nature of a contract after its consummation is a bad precedent
and will provide uncertainty for future lending transactions."
This bill appears to address that concern by limiting its
applicability only to credit transactions occurring on or after
January 1, 2013. As a result, however, it should be noted that
individuals who refinanced in recent years to either take
advantage of lower interest rates or avoid foreclosure will
unfortunately not be protected by the prospective application of
this bill.
ARGUMENTS IN SUPPORT : In support of the bill, the California
Association of Realtors contends that this bill will also
promote sound lending practices, writing:
This bill is entirely consistent with existing policy
regarding purchase money loans. It enacts valuable
protection for homeowners and helps ensure that borrowers
will not be led into an unknowing loss of their
legitimate protections under CCP Section 580b. It will
also reinforce sound loan underwriting by requiring
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lenders to look to the security in a transaction and not
to the generalized assets of the borrower.
Prior Legislation: SB 931 (Ducheny), Ch. 701, Stats. 2010,
prohibits a lender from receiving a judgment for any deficiency
as to the first mortgage or deed of trust following a short
sale.
SB 458 (Corbett), Ch. 82, Stats. 2011, expanded that
anti-deficiency protection to second lien mortgages or deeds of
trust following a short sale.
REGISTERED SUPPORT / OPPOSITION :
Support
Insolvency Committee, Business Law Section of the State Bar
(sponsor)
California Association of Realtors
California Bankers Association
Center for Responsible Lending
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334